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Acc 564 Assignment 4 - Changing The Accounting Information System

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Running head: AIS FAILURE 1
AIS Failure
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AIS FAILURE 2
Introduction
Migrating to a new accounting information system poses various challenges and can
manifest detrimental effects for corporations that are not able to handle the process with due
caution. Various factors can contribute to the failure of the accounting information system at the
design, implementation or operational phase of the process. One real life example of a company
whose accounting information system failed was the Oxford Health Plans Inc. The irregularities
and subsequent collapse of the AIS at Oxford took place between November 6, 1996 and
December 9, 1997. The company had recently migrated to a new system that proved problematic
to sustain beyond the design phase. Incorporating best practice could certainly have helped the
firm to uphold professional conduct and avert the collapse. This discussion explores the events
leading to the failure of the AIS at Oxford, the responsibility of management in the collapse, the
deficiencies at the design phase as well as highlighting the best practices and principles that can
mitigate against such collapses in future.
Background
Between January 1997 and September 1997, Oxford Health Plans Inc. erroneously stated
on its record and internal books aggregate revenues of $81 million (Securities and Exchange
Commission, 2002). During the first quarter of 1997, the overstatement amount was $3 million,
during the second quarter it was $25 million and in the third quarter, the overstatement amount
had jumped to $53, adding up to the total of $81 million of overstatement. This occurred
primarily because the company recorded in its current revenue accounts various items from its
unearned revenue account and its deferred revenue account. Because Oxford billed and in some
instances paid these “future” revenues before the relevant coverage periods, the company
recorded them well as liabilities (Sheehan & Goldner, 2007). However, Oxford did not perform

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AIS FAILURE 3
the appropriate reversing entries during the reclassification of the unearned and deferred
revenues into the current revenue.
Factors That Contributed to the AIS Failure
Various factors contributed to the failure of the accounting information system at Oxford
Health Plans Inc. According to the Securities and Exchange Commission (2002), one of the most
notable factors was ineffective internal controls. Oxford’s internal accounting controls system
did not detect the erroneous entries or prevent the firm from booking the revenues incorrectly.
The system failed to provide reasonable reassurance that the company was executing transactions
in accordance with senior management’s specific or general authorization
(SecuritiesandExchangeCommission, 2002). This led to overestimation of income and
underestimation of medical costs.
In addition, auditing irregularities played a central role in the failure of the accounting
information system at Oxford Health Plan Inc. KPMG was the auditor of Oxford health plan inc
from 1985 to 1998 (Securities and Exchange Commission, 2002). KPMG audited the financial
statements of Oxford for the fiscal year the ended December 31, 1996. In the subsequent report
that it issued on February 18, 1997, it claimed that Oxford prepared the 1996 financial statements
in conformity with all the requirements of GAAP. The auditor also stated that they conducted
their investigations in conformity to the principles advocated by the generally accepted auditing
standards (GAAS).
Nevertheless, as the Securities and Exchange Commission (2012) later found out, KPMG
had knowingly disregarded key evidence signaling accounting irregularities at Oxford, especially
Oxford’s ineffective computer system and lack of effective internal controls. In doing so, KPMG
violated various auditing standards including GAAS Field Work Standards, GAAS General

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Just what I needed…Fantastic!

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